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TIF Hybrids BLOSSOM

Without the right incentives, Georgetown, Texas, might have had to settle for strip malls where a lifestyle center with 17 acres of parkland is now rising.

“And that,” says Tom Yantis, Georgetown assistant city manager, “is the overarching reason for the city's participation” in a creative package of tax increment financing for the new mall, Wolf Ranch, due to open in 2005.

The Wolf Ranch package reflects an emerging trend in tax increment financing. TIFs, the popular incentive with which communities attract developers, no longer rely on property taxes alone. Wolf Ranch is rising on the promise of new local sales taxes the mall will generate.

The 670,000-square-foot center will overlook the San Gabriel River 30 miles north of Austin, Texas, and just past computer giant Dell Inc.'s headquarters in fast-growing Williamson County. Target will anchor the 80 stores on a 100 acre site that will include a tree preservation area and water ponds, as well as other parks.

Developer Simon Property Group Inc. of Indianapolis owns the parkland for the time being, under an intricate financing package that showcases how developers and government weave deals.

Expensive Site

Simon liked the Georgetown site but found it needed a lot of work: grading and leveling, stabilization of the clay soil, preservation of trees to meet environmental requirements.

Site-preparation costs would be $300,000 per acre for the $110 million mall, compared with an average of $120,000 per acre at other Simon sites in the southeastern U.S.

Simon sought Georgetown's help and worked out this arrangement with the city: The property company is paying for $15 million in improvements, including parks, fountains, outdoor seating, scenic overlooks, public parking and utilities. But Georgetown will pay the $15 million back to Simon over 20 years by rebating a share of the revenue from the local sales tax that Wolf Ranch generates.

Georgetown will pay 10 percent interest on the $15 million in improvements at Wolf Ranch. If the city buys back the improvements, which is likely, it would then pay off the bonds with sales tax increments from Wolf Ranch.

Blight Busters

TIFs started as blight busters and still fill that role, though they have spread well beyond dilapidated downtowns.

Forty-eight states now use TIFs. If North Carolina authorizes TIFs in a November vote, only Arizona will remain TIF-less. Biggest users are California, Colorado, Florida, Illinois, Indiana, Minnesota and Wisconsin. Minnesota has more than 2,000 TIF districts, among them its Mall of America. Chicago has more than 100 and Kansas City 50.

TIFs proliferated by using property tax increments. Now, however, sales tax and income tax variations are watering development around the United States.

New revenue streams notwithstanding, patchwork state laws and hostile taxpayers make TIF anything but a sure thing for builders.

Developers argue that a TIF draws jobs, tax revenue and shoppers — and that it's not a handout. Projects still live and die by the market. “No amount of subsidy can go out and take something that isn't market-driven and make it work,” says Bill Hammer, Simon development vice president.

NASCAR and Cabelas

Kansas and Nevada have laws allowing so-called STAR (sales tax and revenue) bonds. Other states allow more limited use of sales-tax increments.

Sales-tax increments helped finance development of the NASCAR Kansas Speedway and the adjacent retail development. Cabelas outdoor store on the same site quickly became Kansas' biggest tourist attraction.

Across the border, Missouri countered with its 2003 Missouri Downtown Economic Stimulus Act (Modesa), which adds both state income tax and sales tax to the mix.

Modesa allows about a third of the new state sales tax revenue from a development and half its new state income tax revenue to pay for improvements.

To be sure, some markets do without TIFs. Spokane, Wash., boasts $1.1 billion in recent construction sans TIFs. The state's TIF law is “a little weak” and never used in Spokane, says Larry Soehren, vice president with broker and management firm Kiemle & Hagood Co.

But the proliferation of TIF hybrids continues. The Oklahoma legislature was considering a sales tax TIF last month. Such legislation passed Washington state's senate this session but failed in the house.

TIFs, meanwhile, still leave some taxpayers stewing. Approval of a TIF often depends on the support of a few local politicians, and constituents worried about underfunded schools or potholed streets can quickly kill a deal.

Some don't like TIFs' new reach. In Nevada as elsewhere, TIFs once intended to fight blight now can build a mall in an open field. “Our law is so broad you could drive a truck through it,” says Carole Vilardo, president of the Nevada Taxpayers Association, Carson City.

TIFs threaten schools, Vilardo says — and that could haunt fast-growing Nevada. When a school's funds fall short, the state pays the balance — meaning that taxpayers may wind up subsidizinga mall, she says.

TIFs' effect on school funding is an issue elsewhere as well — and in some places, schools can say no. Georgia's TIFs, called tax allocation districts or TADs, require legislative approval, local voter approval and finally approval of the affected taxing districts. “In Georgia,” says Charles Johnson, an Atlanta lawyer who works with local governments, “it's an issue of political will.” (See TAD analysis on page 36.)

If schools choose to keep their full share of the tax increment from a development, as happened in Atlanta, a project has less financial leeway.

And local politics can sink deals outright. Wolf Ranch developer Simon had to walk away from a different project elsewhere in Texas when a new mayor turned out to be anti-subsidy. But local governments must also beware — of other local governments. Once a developer decides on a market, the best local incentive package may well get the mall. Georgetown, with a population of 36,000, hotly debated the Simon deal before it was unanimously approved by the city council in May 2003. Critics may still worry that it puts the town's sales tax reserve at risk, which could force property taxes to go up.

And what about precedent? Would the town now have to subsidize other developers? “No, of course you don't,” says Georgetown's Yantis. “Granting public funds for private developers ought always to be at the total discretion of the governing body.” From Yantis, an official who worked hard to float the Georgetown deal, that sends a clear signal: TIFs can make all the difference — but whether you get one always depends on which way that Texas wind is blowing.

CLEARING THE WAY

TIFs can move a planned project off the drawing board and into construction.

The first tax increment finance law passed in California in 1952. More states followed, particularly as federal urban-redevelopment aid faded in the 1980s. TIFs rose in its stead to help rebuild city cores — and to add shopping malls at the periphery.

TIF's underlying premise is that a new development will pay more in property taxes than whatever was on the property before. That anticipated tax increment bootstraps the project.

Here's how the basic model works: Say a developer wants to erect a mall but the site needs a lot of work. If it's in the inner city, it may require demolition of buildings, construction of parking ramps and even toxic waste cleanup. If it's in an outlying area, the site may need roads and sewers.

Such costs can run to one-third of a project's expenses, and might even kill the project. TIF to the rescue: TIF laws let local governments divert new property taxes that a development generates to pay for improvements to the site up front.

Local government creates a TIF district around the new project. The city or county then sell bonds to pay for improvements the project needs to get off the ground. Over time, added property tax revenue from the district goes to pay off the bonds.

After thus helping self-finance thousands of projects, TIFs have taken a new direction in recent years. Property tax increments may be an insufficient source of revenue, particularly if a taxing authority — such as the local school district — refuses to give up its increment from a project.

So, states and developers have turned to sales-tax and income-tax increments to pump up funds for improvements that sweeten a deal. — MH